Markit Group Ltd., the data provider partially owned by Wall Street’s largest banks, is planning the first derivatives index tied to newly issued commercial-mortgage bonds in five years as sales of the securities rise.
The so-called Markit CMBX.6, the sixth series of the index last updated in May 2008, is planned for January, according to Alex Paidas, a spokesman for Markit in New York. The benchmark, which allows investors to buy or sell derivatives to hedge against losses on commercial-mortgage debt or to speculate on the likelihood borrowers will meet obligations, may be linked to as many as 25 bonds sold during the past year, Royal Bank of Scotland analysts said in a report yesterday.
Wall Street is creating the latest version as issuance of bonds tied to everything from mobile home parks to skyscrapers climbs. Lenders accumulate commercial property loans for several months before packaging them into securities. Price swings in the interim can eat into profit margins on new deals.
The new index “may serve as a more efficient hedging vehicle” for underwriters, Royal Bank of Scotland analysts led by Richard Hill said in the report. “CMBX.6 may be a catalyst for future growth.”
The existing CMBX indexes are linked to deals issued during the property boom when values peaked in 2007 and underwriting standards slipped. The delinquency rate on underlying securities in those indexes has climbed to more than 10 percent, Bloomberg data show. A new gauge will be more correlated with recent deals with tighter underwriting, according to the Royal Bank of Scotland analysts.
“Over the past year, there have been more than 20 sizable CMBS primary-market issuances, which has created demand for an appropriate synthetic hedging and investment tool that is better representative of that new issuance,” Ned Lipes, director in Markit’s structured finance business, said in an email.
Credit Suisse Group AG forecasts as much as $45 billion in commercial-mortgage securities this year, compared with about $28 billion in 2011, according to data compiled by Bloomberg. A record $232 billion was issued in 2007.
Prices on a CMBX index linked to some of the riskiest debt sold during the market’s peak rose to 64.7 yesterday from a 2012 low of 57.3 on May 17, according to Markit. Values on the gauge rise as investor confidence increases.